Godrej Consumer Products (Q4 FY12)

CMP Rs548, Target Rs602, Upside 10%
 

• GCPL continued its strong growth momentum during Q4 FY12 by recording 30.9% yoy growth in revenues at Rs13.2bn – marginally below our expectations of Rs13.6bn. The growth was primarily led by a healthy 20% yoy growth in the domestic business, which contributes ~59% to consolidated revenues. 
   
  Strong growth across all businesses
  

  Business	% yoy
  Domestic business	20%
  Insecticides	28%
  Soaps	30% (17% volume growth)
  Hair Colours	13%
  International business	65%
  Indonesia	30%
  Africa	350%
  Latin America	29%
  UK	21%

  Source: Company, India Infoline Research
   
  In the domestic business, the key segments - Home Insecticides recorded 28% yoy growth (23% volume growth, eighth consecutive quarter of over 25%+ growth,) while Soaps revenues grew by ~30% yoy - ahead of the category growth of 4%. Over the past two years GCPL has gained over 700bps market share in home insecticides segment to over 40%. GCPL reported strong ~17% volume growth in soaps segment mainly on account of small competitors losing to all branded players due to commodity inflation and currency fluctuation. We expect GCPL’s volume growth to come down to low teen/single digit with these small players returning to market as raw material costs stabilize. Hair colours segment reported dismal performance during the quarter recording mere 13% yoy revenue growth, with single digit volume growth (~7-8%) led by launch of Godrej Expert Advanced.

• International business reported strong 49% yoy increase in revenues at Rs5.2bn primarily driven by 30% yoy growth (comprising ~21-22% yoy constant currency growth) registered in Megasari in Indonesia (at Rs2.6bn, contributing 50% to revenues) and operating margins of 20.7% - an increase of 100bps yoy. The strong revenue growth was mainly on back of distribution expansion and healthy performance of new product launches. The Middle East business registered revenues of Rs60mn during the quarter.
  

• Africa business (contributing 25% to international business revenues) saw the full inclusion of the Darling acquisition. This business (comprising Rapidol, Kinky, Tura and the Darling Group) clocked revenues worth Rs12.8bn and OPM of 19.3% during the quarter. Low cost raw material inventory, favourable mix and seasonality in the Darling Group’s hair extensions business cushioned operating margins. The management has indicated that these margins are unlikely to sustain and the business would trend towards Darling Group’s historical average margins of ~20-22%. Latin American business of GCPL, contributing 16% to international business revenues recorded strong 29% yoy revenue growth at Rs820mn (constant currency growth of ~22-23%) and operating margins of 16.3%, ~300bps yoy expansion. The European business contributing 9% to international business revenues recorded 21% yoy growth at Rs480mn and operating margins of 10.5% (up 470bps qoq) during Q4 FY12.
   

• GCPL witnessed a 170bps expansion in operating margins during the quarter at 18.8% fueled by 210bps drop in overhead cost due to lower sales promotions and operating leverage and synergies of the merger of the GCPL and Sara Lee businesses. The expansion could have been even better but for 200bps/90bps increase in staff (higher variable payout) and advertising (on the hair colour launch) cost respectively. Despite ~33% dip in other income, consolidated net profit for the quarter registered a strong 25% yoy growth at Rs1.7bn  driven by strong topline growth coupled with improved operating efficiency. Adjusted net profit after extraordinary income of Rs243mn and minority interest, increased by 36% yoy to Rs1.9bn. Adjusting for the extraordinary income of Rs250mn (related to termination of Brylcreem manufacturing and distribution license), forex loss of ~Rs8mn and minority interest, APAT increased by 36% yoy to Rs1.9bn.

• During FY12, GCPL reduced its working capital by over Rs1bn excluding the new acquisition of Darling Group. The debt to equity ratio has come down to 0.43x against 1x in FY11. While the ratio is likely to move upwards as the next tranches of payment for the Darling business come up, we expect it to remain below 0.5x at the end of FY13. GCPL utilized the proceeds from the Tamasek deal for reducing the foreign debt to US$300mn from US$400mn in September 2011.
  
• GCPL is transforming itself in to an emerging-market play on high growth categories such as home insecticides, hair extensions and hair colours. With strong growth momentum in both domestic and international businesses, successful acquisitions, GCPL management is confident of achieving 26% revenue CAGR over the next 10 years. Around 10% growth is envisaged through the inorganic route which translates into a 10x jump in revenues by 2021. GCPL’s successful acquisition integration in the past makes us confident of the management’s ability to derive synergy benefits. We maintain Buy with a revised 9-month price target of Rs602.